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Economy: The United States needs to foster education and innovation to keep its cutting edge

26/06/12 - The United States should do more to foster innovation and provide more equitable access to high-quality education in order to maintain its status as the world’s most vibrant and productive economy, according to OECD’s latest Economic Survey of the United States.

Data from the Survey suggest the United States is losing its cutting edge in innovation. This affects prospects for long-term growth and for maintaining living standards. Productivity in the U.S. is still growing faster than in most other OECD countries but growth has slowed down since the 1970s. Also, U.S. companies are no longer more likely to innovate than companies in other OECD countries.

Particularly worrying is the performance in education, which is essential to provide workers with the skills necessary to become more productive and to adapt to technological change. Attainment in tertiary education stagnated over the past three decades while it grew significantly in almost every other OECD country. Today, 22 out of 30 OECD countries surveyed have more graduates in science and engineering among the 25 to 34 year old workers than the United States.

“The United States is still one of the most innovative economies in the world but competition is growing and we need better policies to keep the U.S. at the frontiers of innovation”, said OECD Deputy Secretary-General Richard Boucher.

The report recommends increasing the number of graduates in STEM (science, technology, engineering and math) subjects by giving more students access to quality secondary education. Cuts in the federal budget for research and development should be as limited as possible. Ideally, the 2007 decision to double the budgets of three key science agencies within a decade should be implemented. Further reforms in the patent law should promote innovation by limiting the possibility to extract disproportionate licensing fees for minor patented functions within complex products.

To prevent long-term unemployment from becoming chronic, the Survey suggests a greater focus on “active” labor market programs that help to facilitate job search and guide individuals towards training and education. These measures have proven to be effective even during periods of high unemployment and should complement existing “passive” benefit programs. The United States spends very little on activation policies relative to other OECD countries.

The Survey also highlights rising income inequality in the United States. The trend owes mainly to rising skill premiums and disproportionate income growth for top earners over the past two decades. High income inequality is also associated with low intergenerational social mobility. Children born to low-income parents in the U.S. find it more difficult to move up the social ladder than in most European OECD countries.

Providing equal access to high-quality elementary and secondary education is essential to addressing this challenge. The Survey also notes that the U.S. tax and benefits system is much less effective in reducing relative poverty than that of other OECD countries. This is largely the result of the limited and poorly targeted financial transfers to low-income households.

The Survey suggests that broadening the tax base through reduced tax expenditures, such as for mortgage interest, as well as harmonizing the tax treatment of different forms of capital income while simultaneously lowering the corporate tax rate could help to reduce income inequality and at the same time boost investment and long-term growth.

For the short term, the Survey recommends that monetary policy continues to support the recovery and that current legislation be amended to avoid a sharp fiscal tightening in early 2013. Fiscal consolidation instead should be implemented at a gradual pace and as part of a medium-term framework to restore fiscal sustainability. The OECD projects that the U.S. economy will grow by 2.4% in 2012 and by 2.6% in 2013.

>> Further information on the Economic Survey of the United States is available at: http://www.oecd.org/eco/surveys/us. You are invited to include this Internet link in coverage.

>> To read and share the full report online from your computers, tablets or smart phones, please use: http://oe.cd/38.

>> For more information journalists are invited to contact Matthias Rumpf at the OECD Washington Centre on +1 (202) 445 80 58.